751.5 MSP/2–1152

No. 498
Memorandum by the Deputy Director of the Policy Planning Staff (Ferguson) to the Secretary of State 1

top secret
  • Subject: French financial position and its relation to London Tripartite talks.2

1. Order of magnitude of French financial problem.

There is not available sufficient statistical data to give precision to the French need for financial assistance in calendar year 1952 [Page 1151] and the first six months of calendar year 1953. It is doubtful whether such statistical information can be assembled and far more probable that rough estimates will have to be relied upon.

First six months of calendar year 1952.

Financial aid of $600,000,000 already promised to France for the period ending June 1952 has not been forthcoming at the anticipated rate. The existing methods by which this aid is being given to the French will probably result in only $400,000,000 of assistance by the end of June. To meet this gap it is possible, by scraping the bottom of the barrel of Title I funds and utilizing the remaining transfer authority, to give the French about $150,000,000, which ought to meet the French dollar balance of payment problem and provide counterpart funds which would give budgetary assistance. To cover the remaining $50,000,000 of the present aid commitment it may be possible to deliver end items to Indochina in substitution for end items produced in France and it may be possible to accelerate other existing channels of assistance slightly.

In short, provided the necessary decisions are taken by Mr. Harriman (probably after consultation with Mr. Lovett) we should be able to fulfill our commitment to the French during the remainder of our fiscal year 1952.

Second six months of calendar year 1952 and the first six months of calendar year 1953.

Rough estimates indicate that the French needs for financial assistance in the second half of calendar year 1952, over and above end item assistance, will range from $300,000,000 to $500,000,000. Aid of comparable magnitude will probably also be required by the French in the first six months of calendar year 1953.

The ability of the United States to provide assistance within the range of $600,000,000 to $1,000,000,000 will depend upon the program approved by the Congress this spring. It is estimated that if the provision authorizing the transferability of 10% of the funds is not altered and the Congress approves, without serious cuts, the amount of $1,400,000,000 to be requested for economic aid and $1,000,000,000 to be requested for offshore procurement, the necessary assistance can be provided to the French. If aid of this magnitude is given to the French, however, it will be extremely difficult to meet any other emergency needs that may arise during our fiscal year 1953.

2. Methods of making assistance available to France after June 30, 1952.

Since no presentation has yet been made to the Congress in connection with the 1953 aid program, it is possible to select the most appropriate basis for the possibility of aid to France and try to [Page 1152] secure Congressional approval. A number of methods have been suggested, all of which raise difficulties, so that this matter requires the urgent decision of Mr. Harriman and Mr. Lovett in consultation with you.

The estimated cost of training, equipping, housing and providing facilities for increased Associated States forces over the next two years is approximately $400,000,000 a year. All but a small part of this amount represents expenditures in local currency in Indochina. It is argued that it would be easier to secure Congressional approval to finance the training and equipping of these forces than for any direct assistance to France in connection with offshore procurement. The difficulty of substantially increasing offshore procurement rapidly is that it would involve taking over many existing French contracts, and the Defense Establishment has maintained that to do so would be contrary to their regulations and would result in the financing of contracts with French businessmen on more favorable terms than can be given to American businessmen. While it is expected that an item of $1,000,000,000 for offshore procurement would be included in the request for the 1953 program, it is not anticipated by the Defense Establishment that these funds would be used to pick up any existing contracts and therefore the benefit to France of such procurement would not be rapidly evident.

If the aid to the French is in the form of the assumption of American financial responsibility for the creation of additional Associated States forces, and this aid is made directly available to Indochina by the purchase of local currencies, the United States would take on very large responsibilities for the effectiveness of these forces and the success of the program. Even if some method were devised of channeling the aid directly to France, and leaving to the French the responsibility for making available local funds in Indochina, there would still be an implicit United States involvement in the success of the Indochinese program. One additional difficulty is that there presently exists an artificial rate of exchange between the franc and the Indochinese piastre, a rate which overvalues the piastre by two to three times. Part of this artificial overvaluation is of course washed out as profits are transferred to France and taxed there and part of it is washed out, so far as the French budget is concerned, as a result of imports from France to Indochina. Nevertheless, it is possible that the French budgetary problem could be improved by the establishment of a more realistic rate between the franc and the piastre, and it might be necessary to have an alteration of the rate to avoid problems with the Congress.

[Page 1153]

3. Relation of United States assistance to French decisions on EDC, contractual relations, etc.

In conversations with Schuman the French financial problem will undoubtedly play an important part, and our ability to provide economic aid should help to secure French agreement on the political problems to be discussed. In a sense the amount of aid is more a question of the bargain that will satisfy the French than one derived from actual French requirements, but it is likely that the two will not be far apart and will be in the neighborhood of $500,000,000 for the second half of calendar year 1952 and an equal amount for the first half of calendar year 1953. While the French difficulties are certainly increased by their financial problem there are many other factors which enter into the French position on the EDC and German contractual relations. The French recognize the strain that is imposed upon them by trying to maintain sizeable forces in France and carrying on the Indochinese war and they are concerned about their inability to achieve a balance with Germany’s military capability. If additional United States aid and the danger of destroying the whole NATO program which would result from the failure to secure an EDC and a settlement with Germany can bring the French around on these European political matters it will be a considerable achievement. It does not seem very probable that it will be possible to get very far in London with the question of action against China or other matters not directly related to the European scene. While we should press for the maximum amount of agreement with the French on policies within and outside Europe, excessive pressure might weaken the chance of securing the most necessary political decisions—those relating to Germany.

4. Further work to be done.

A working group has been established with representatives from MSA, State, Treasury, and Defense to look more closely into the size of the French financial needs and the methods of making assistance available. It is hoped that this working group can gather material quickly which can be sent to you in London by the weekend.3

It seems clear that it will be necessary for you, Mr. Lovett and Mr. Harriman to meet in London if the question of aid to France is to be dealt with in the Tripartite talks since the decisions required cannot be made by the State Department.

John H. Ferguson
  1. At the Secretary’s daily meeting on Feb. 8, most of the discussion was devoted to the French budgetary problem. It was concluded that the Secretary must be in a position to know how far he could go on the question of assistance to the French on Indochina before he left for London and Lisbon in several days where this subject would be discussed. Nitze stated that he would try to have something by Monday, Feb. 11; presumably this memorandum was drafted for this purpose. (Secretary’s Daily Meetings, lot 58 D 609, “February 1952”) Nitze also drafted a brief outline listing the considerations bearing on the question of assistance to France; this outline, dated Feb. 8, is in PPS files, lot 64 D 563, “France”.
  2. Concerning these talks in London, see Document 505.
  3. Numerous staff level meetings between representatives of the Departments of State, Treasury, and Defense, and the Mutual Security Agency took place during the following 2 weeks; documentation concerning these meetings is in file 751.5 MSP.